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Unpublished Paper
Pollution Externality and Pollution Abatement Capital: A Closed-Form Solution for the Investment Rate of a Green Firm with Uncertainty and Irreversibility
USAEE Working Paper No. 10-045 (2010)
  • Giuseppe Travaglini, Prof.
Abstract

This paper focuses on environmental policies aimed at rising investment in pollution abatement capital. Capital irreversibility is not postulated but endogenized using a quadratic adjustment cost function. We assume that ecological uncertainty, i.e. uncertainty over the dynamics of pollution, affects firm investment decisions. Closed-form solutions for the investment and value of a green firm are derived, showing that irreversibility reduces its fundamental value. The effects of environmental policies are investigated considering taxes on polluting inputs and subsidies to reduce the cost of abatement capital. Environmental policies promoted to enforce abatement capital may generate the unexpected result of reducing the abatement investment rate.

Publication Date
Fall October, 2010
Citation Information
Giuseppe Travaglini. "Pollution Externality and Pollution Abatement Capital: A Closed-Form Solution for the Investment Rate of a Green Firm with Uncertainty and Irreversibility" USAEE Working Paper No. 10-045 (2010)
Available at: http://works.bepress.com/giuseppe_travaglini/18/